Tuesday, December 18, 2012

Macro, what have you done for me lately?

This is actually a relatively tranquil time in the field of macroeconomics. Most of us now speak the same language, and communication is good. I don't see the kind of animosity in the profession that existed, for example, between James Tobin and Milton Friedman in the 1960s, or between the Minnesota school and everyone else in the 1970s and early 1980s. People disagree about issues and science, of course, and they spend their time in seminar rooms and at conferences getting pretty heated about economics. But I think the level of mutual respect is actually relatively high...

Since the 1970s, it is hard to identify a field called macroeconomics. People who call themselves macroeconomists have adopted ideas from game theory, mechanism design, general equilibrium theory, finance, information economics, etc. to study problems of interest to policymakers and the public at large. Sometimes it's hard to tell a macroeconomist from a labor economist, from someone working on industrial organization problems. What are "freshwater" and "saltwater" macro? No idea...

The truth is that we have all moved on from the macro world of the 1970s. Methods that seemed revolutionary in 1972 are the methods everyone in the profession uses now. The nerds who had trouble getting their papers published in 1972 went on to run journals and professional organizations, and to win Nobel prizes. This isn't some "cult that has taken over half the field," it's the whole ball of wax... (emphasis mine)

Economic science does an excellent job of displacing bad ideas with good ones. It's happening every day. For every person who places obstacles in the way of good science to protect his or her turf, there are five more who are willing to publish innovative papers in good journals, and to promote revolutionary ideas that might be destructive for the powers-that-be. The state of macro is sound - not that we have solved all the problems in the world, or don't need a good revolution.

On the question of whether macro is divided into warring "schools", I'd say Williamson is 85% right, and Krugman only 15%. Yes, there are some systematic disagreements, but they're not very bitter or rancorous, and everyone uses mostly the same "language". The old "freshwater"/"saltwater" distinction is still there to a limited degree among older faculty, but younger faculty don't seem to see much of a dividing line. (Krugman even hints at this when he mentions the fact that "saltwater" and "freshwater" models now look very much alike.) In the blog world you see lots of name-calling and rhetorical fireworks and serious consideration of "fringe" ideas, but in the academic world of conferences and seminars and journals, there seems to be almost none of that.

So if collegiality and similarity of technique are measures of a field's health, then macro is doing quite well. But I feel like there's a larger question: What has macro done for the human race in the last 40 years? How are we better off as a result of all this macro research effort?

(This is the more general version of the question asked by the Queen of England, when she asked why (macro)economists didn't see the financial crisis coming. Sure, some people argue that "financial crises" are inherently unpredictable because of the EMH. But there's no obvious reason why recessions shouldn't be predictable in advance.)

Today, in 2012, do we know much more about the "shocks" that cause recessions than we knew in 1972? I'm not sure we do. The question of whether these shocks are mainly "real" or mainly "monetary" is not settled within the field (as Bob Lucas mentioned in a recent interview). Nor do we seem to know much about how the shocks actually work - usually, macroeconomists just assume the shocks follow a simple random process like an AR(1).

What this means is that the actual cause of recessions is basically still one huge mystery.

What about the question of how the economy responds to the shocks? Even if we don't know much about the cause(s) of recessions, do we understand how recessions play out? I'm not sure we do. We have some empirical observations, of course - we know how much investment tends to vary with swings in GDP, etc. But in terms of impulse responses - i.e. the way the economy would move if all the noise were cleared out of the data - we have as many different guesses as we have macro theory papers. And macro theory papers are as numberless as the stars in the night sky.

What about the question of policy? Do we know how governments can damp out the swings in the business cycle? Here there seems to be very little agreement. Even if macro isn't divided into warring camps shouting at each other, there is nevertheless a huge diversity of opinion on both the efficacy and the proper conduct of monetary policy, fiscal policy, and other recession-fighting measures. That there is no consensus means that the question is still unanswered. Useful technology has not been delivered. It doesn't take an expert to realize that fact. (Update: Well, actually not quite. Constantine Alexandrakis comes up with a couple of important counterexamples; see below.)

So macro has not yet discovered what causes recessions, nor come anywhere close to reaching a consensus on how (or even if) we should fight them.

(As an aside, modern macro models - at least, the DSGE variety - are basically not regarded as useful by private industry, although time-series methods developed for macro, such as vector autoregressions, have seen wide application.)

Given this state of affairs, can we conclude that the state of macro is good? Is a field successful as long as its members aren't divided into warring camps? Or should we require a science to give us actual answers? And if we conclude that a science isn't giving us actual answers, what do we, the people outside the field, do? Do we demand that the people currently working in the field start producing results pronto, threatening to replace them with people who are currently relegated to the fringe? Do we keep supporting the field with money and acclaim, in the hope that we're currently only in an interim stage, and that real answers will emerge soon enough? Do we simply conclude that the field isn't as fruitful an area of inquiry as we thought, and quietly defund it?

And who do we call in to evaluate the health of a science? If we only rely on insiders to evaluate their own field, we are certain to run afoul of vested interest (If someone asked you "How valuable is the work you do", what would you say?). But outsiders often lack the relevant expertise to judge someone else's field.

It's a thorny problem. And (warning: ominous, vague brooding ahead!) it seems to be cropping up in a number of fields these days, from string theory in physics to "critical theory" in literature departments. Are we hitting the limits of Big Science? Dum dum DUMMMM...But no, this question leads us too far afield...

Update 2: Simon Wren-Lewis drops by in the comments to say that yes, macro did produce a policy consensus (basically interest rate targeting by the Fed, with a Taylor Rule type objective function balancing growth stability and price stability), and yes, that policy consensus did help the world, by giving us the Great Moderation, which wasn't perfect but was better than what came before. I guess that's a fair point. But I'd point out that:

A) the New Keynesian models to which Simon is referring were made after the 70s inflation and early-80s Volcker disinflations, and the Great Moderation policies might have been mostly inspired by the Volcker episode rather than by the models that came after it;

B) the New Keynesian "consensus" was always rather fragile, accepted by central banks but pooh-poohed by the academics that Krugman calls "freshwater" macroeconomists; and

C) Taylor-type rules were originally estimated as Fed reaction functions, describing Fed behavior rather than prescribing it (later they became prescriptive when added to Woodford's New Keynesian models), so it seems that the Fed may have been behaving in the way it did in the Great Moderation well before New Keynesian models emerged to endorse the policy.

So I am still very skeptical of the notion that modern macro models motivated the Great Moderation policies rather than just describing them after the fact...But I guess I could be convinced.

Update 3: In the comments, Costas Alexandrakis (CA) points out that the development of the ideas of adaptive expectations (Friedman) and rational expectations (Lucas) helped put an end to the mistaken idea that the Phillips Curve represented a stable, usable policy tradeoff between inflation and unemployment. This is a good point. Exposing the flaws in bad economic policy is just as important as suggesting good economic policy. So this is definitely an exception to my sweeping statement that macro hasn't given us much in the way of policy advice. Also, Costas points out that Lucas' idea of rational expectations helped motivate the Fed's practice of "forward guidance". This I'm not so sure has been effective, but it is definitely another interesting counterexample.

Update 4: Brad DeLong thinks I am using the phrase "techniques of modern macroeconomics" too loosely, and lists a number of questionable Steve Williamson quotes that he thinks should be inconsistent with the true "techniques" of macro. But I think that that doesn't negate the ubiquity of DSGE modeling in modern macro journals and conferences. Steve Williamson certainly does use DSGE in his theory papers, and he certainly does get published...

Update 5: Paul Krugman also says that just because everyone in (mainstream) academia uses DSGE doesn't mean that they're really using the same "techniques"; the content of the models makes all the difference.

Update 6: Scott Sumner comments. He disagrees with my observation that the freshwater/saltwater conflict has waned. His answer to the question of "what causes recessions" is "aggregate demand shocks", but this doesn't really answer the question of what is causing those shocks (of course, Scott Sumner thinks NGDP targeting can perfectly cancel out any aggregate demand shocks, so maybe he doesn't even care where the shocks come from). He agrees that modern macro methods (DSGE models) have given us no useful technology of any kind. And he endorses replacing the current mainstream macro profession with "Market Monetarists" like himself and David Beckworth.

Update 7: Brad DeLong weighs in. He agrees that academic macro hasn't produced useful models (actually I myself wouldn't go quite that far; I think academic macro simply hasn't produced models that we can know are useful in time to use them). He says that economists in the public sphere have been less than helpful since 2008 primarily because of political pressure from the conservative movement.

174 comments:

Unless you take the Sumnerian perspective that they are always preventable by the Fed, in which case they would never happen if they were predictable. If we had negative rates, I think Sumner would be right. Meanwhile, back in the real world, if a shock pushes the natural rate sufficiently negative, there isn't much we can do about it, and it should be pretty easy to predict a coming recession.

Quite. The whole reason we have such little progress in understanding the causes of recessions and therefore policy responses is that there IS so much agreement and lack of concern about methodology. Until this is seriously contested with serious investigation about why a particular approach is so singularly dominant we will never get answers. For example, political science threw away game theory in the 1980s as a means to explain Cold War dynamics and stability in international relations. It questioned the units of analysis (eg. states) as the basis for discussion. It was then better able to deal with new security threats from non-state actors, such as Al Qaeda from the 2000s. The big intellectual debates taking place in philosophy (eg can analysis ever really be scientific or objective) have impacted on most social sciences; yet to happen in economics.

"Do we simply conclude that the field isn't as fruitful an area of inquiry as we thought, and quietly defund it?"

If it's quantum field theory, then, my vote is "yes." But if the question is "are we throwing trillions of dollars out the window for no good reason?" I'd say no, lets keep thinking about it.

In my experience (two degrees in physics, one in economics/finance) the physicists are smarter, both on average, and at the extremes. So maybe defunding the physicists and *increasing* the funding in macro will divert the efforts of some actually brilliant people to make some actually useful contributions to humanity.

"Hm, what's wrong with quantum field theory? Seems to work quite well, and toproduce lots of usable results for the real world."

Where do we start? How about, there are only two field theories anyone who caresabout real world problems ever cared about: gravity and electromagnetism. Thequantization of the second, to the extent it makes any difference, was *fully*understood by 1950. The first has never been successfully quantized, and anywaysnobody will ever care about quantum gravity.

So what was left? Weak and strong forces, high energy unification, supersymmetry,strings, whatever. So back in the '50s and '60s progress was made on quantization ofthe weak and strong fields and lots of related, theoretically predicted particleswere subsequently found. Cool! But it never made any difference. Nuclei are so messyand complicated and hopeless to model, and the precision with which anyone who needsto (weapons, reactors, nuclear medicine) is quite insensitive to the theoreticaldetails. We just look it up in empirically determined tables. Even then, if anybody(say fusion researchers) ever needs detailed models of strong force interactions,the basic theory was all pretty well done over 40 years ago. The last known testableprediction of QFT was the utterly irrelevant Higgs particle, recently found by CERNat staggering expense.

By the '80s, having run out of ideas for testable new theoretical predictions,physicists turned to the purely metaphysical, and basically stopped makingpredictions at all. I'm not even kidding. If you want a lively summary, by anexpert, of what has been achieved in the past 30 years, I suggest you go check outPeter Woit at Not Even Wrong.

"Why would you want to defund it?"

It's a waste of brains. *Really* good brains. Theoreticians and experimentalists inthe field are among the best scientists in the world. [We could do worse of course -weapons, Wall Street - but that's setting the bar pretty low.]

"And you are a physicist? You're the same K who comments at Nick Rowe's and ScottSumner's place? I wouldn't have guessed..."

I don't really disagree with many of the things you say, but even if you have a bone to pick with current high energy physics theory, this does not mean that there is anything wrong with Quantum Field Theory as such. The problems with String theory and the critiques of Woit, Smolin I am well aware of.

I disagree with your claims that there has not been any useful progress. Nuclear physics is in fact progressing nicely, and the effective theories used to model interactions there are well informed by QCD and better for it, and there is even quite a bit of progress in calculating larger and larger nuclei, for one thing. I grant you that it is not as glorious as it was once regarded.

Same with hadron structure: Lots of computer simulation, but also really significant improvement in understanding parton distributions, for which there are many older experimental results that are still waiting for interpretation.

And of course condensed matter physics is also QFT now, superconductivity, quantum dots, all very useful stuff based on QFT, with practical applications.

So I think you are a bit quick to dismiss the usefulness of QFT.

I was afraid that you might be coming from some other corner ("it's all nonsense, it has UV divergences and needs regularization! We need something better, like string theory!"), glad that's not the case. If you purely think about usefulness in practical terms, I agree that the high-energy stuff is unlikely to lead to anything useful in the near future, and maybe not ever.

I had you pegged as an economist, since you really seem to know your macro theory. That's meant as a compliment. I would not have guessed that this is not your first vocation.

I did, in fact, allow that QCD may have practical applications, though I think it's true that this has not occurred to date. We haven't learned anything *practical* about nuclear properties that we didn't know already experimentally. The examples of computational advances you bring up are useful to *nuclear physicists*, but not probably not to anyone else. And, as I said, nothing new there *theoretically* since the '70s. But you probably know better than me; I left the field 20 years ago.

"condensed matter physics is also QFT now"

I should have said high energy physics, not QFT. Absolutely, condensed matter physics is useful. It's HEP that's outrageously expensive. And it's SUSY/string grand unified theory dreams that are the justification for all of it, and things are now beyond ridiculous. Apparently the space of possibly standard-model-consistent string theories is now 10^500 times as big as thought five years ago!!!??!?! Talk about getting lost in a bad place! And things were bad to start with. And in the remote possibility that they ever find their way out, what does the world get? Nothing! When they killed the SSC I thought that was a travesty. I was wrong. It's high energy physics that's the travesty. Our saving grace now may be that they found the Higgs right about where the standard model said it would be, no surprises. All done now, nothing to see here, so hopefully we are running out of excuses to keep kicking this can down the road any further.

"If you purely think about usefulness in practical terms, I agree that the high-energy stuff is unlikely to lead to anything useful in the near future, and maybe not ever. "

Right. I am, indeed, ignoring the concept of "utility to physicists!" Bottom line, if you want to advance the state of lattice QCD (or whatever they do these days) that's probably a good thing. It's at the boundary of things that just might be useful for something. But if your research proposal involves trying to poke holes in the standard model I think we should fund it at the same level as post modern literary criticism. If we need quantum gravity in 200 years, I say we develop it then. In the meanwhile, I think there are better uses of our finest minds.

The high energy physicists are completely distracted. If we could get them to focus on actual physics they might be able to do something useful (I know some mathematicians who can solve the quantum mechanical equations for *actual real world problems*, solar panels, batteries, etc., and they could use some apprentices) but instead they're wasting their mathematical talent on silliness like the SSD, rather than using it to help the world.

It is now possible, for a select (but very useful) class of real-world problems, to set up the question of "how do we make the most efficient solar panel given the following materials", or "how do we store the maximum amount of energy in magnetic spin in these substances and then release it on demand", or "how do we convert magnetic spin energy to electrical energy most efficiently" as a set of equations and inequalities subject to optimization using calculus of variations style techniques -- and then *solve* them in a manner which, when you're done, produces a (quantum) circuit diagram which can simply be *manufactured*.

And nearly all the physicists who are good enough at the math to follow the math correctly are wasting their time in high energy physics. Wasting their minds. There are a few in materials science who are interested and able to follow the math, but awfully few.

There is one rather important thing I disagree with here. I think we have made a great deal of progress in how to stabilise the economy and control inflation over the last 40 years. Now that did not cover everything, like financial crises and zero lower bounds, but in the mid 70s we were still using incomes policies to try and control inflation!

I also think this showed up in the data. The Great Moderation was at least partly down to better policy, and I don't buy the argument that it was shown to be false by the Great Recession. Large negative shocks apart, we are much better at controlling the economy than we were 40 years ago.

...but was DSGE type modeling (or VARs, or any other modern technique, for that matter) really instrumental in improving our monetary policy? Seems to me that New Keynesian models didn't really come out until the 90s, and by then, incomes policies had already been abandoned, and interest rate targeting was the "in thing", with Volcker's costly disinflation being the example that convinced people.

Then it seems to me that New Keynesian models were developed to basically combine the seeming lessons from the late 70s/early 80s with the intuition of Friedman and the rational expectations methodology demanded by Lucas and Prescott.

Did the New Keynesian models change central bank behavior? Maybe. Did they change central bank behavior in a way that led to the Great Moderation? I guess I could be convinced...

there are certainly things macro that are better understood in today's theories. It strikes me that things that affect theory the most today are politics and sociology. So much is still affected by demand and transfer payments, societies change, markets change, monetary policy change but the basics are still there. Savings rate, liquidity rate. Bubbles can be predicted ,but who wants to apply the brakes? Political dogma is sickening in it's inaccuracies. I think the tail does wag the dog too often, if noticed, who has a voice to point this out? That's the bigger question than competing economic factions. The lack of demand and leveraging in the economy is very evident, how could any school of of economics disagree on the short term solution?

The points you made in the post only hold if you add 'New Consensus' or, perhaps, 'New Keynesian' to the mentions of the macroeconomics/macroeconomists in the text. It is true that alternative paradigms are of marginal notoriety compared to the New Keynesianism, but I think that, for example, Post-Keynesianism is experiencing its second rise with the advent of SFC models a la Godley.

"As an aside, modern macro models - at least, the DSGE variety - are basically not regarded as useful by private industry"

You mean to tell me that companies aren't impressed when you can make a model that almost gets the historical average of the variances and co-variances of a handful of aggregate variables kind of close to what the historical variances and co-variances are known to be?

On a more serious level, I propose a list, and if you have to answer "no" to any of the questions in the list, you should have to destroy your model:

1. Does it include money?2. Does it include the price level and inflation?3. Can any firm change the price of the good they sell?4. Can any firm make economic profits?5. Does the model include monetary policy?

Maybe I'm just naive, but those seem like pretty basic things that a model of the economy should include.

I'm afraid that pretty much any DSGE models formally conforms to those requirements. The real problem is that the substance of how DSGE models handle those things is sadly lacking.More interesting would be to demand from the model to be based on the ODEs, include disequilibrium trading, heterogenous agents and capital, fix- and flexprice markets, banks and debt.

You could argue that unless and until macro places greater focus on endogenising ‘shocks’ and providing a meaningful explanation of how recessions/depressions are generated by market systems as a recurrent byproduct of their routine operation then the whole field is heading up the wrong path. Economists should be intrigued by the pathologies of the economy, not satisfied with coming up with models that can approximate economic dynamics during periods of relative placidity. I’m reminded of a quote from Stiglitz about pre-crash econ:“It was as if we had developed a medical science that could treat individuals’ colds, but had nothing to say about serious illnesses. A doctor that said that that was good enough, because most of the time individuals were either healthy or suffering from the sniffles, would not be taken seriously; but that was the position taken by much of mainstream economics.”

"And who do we call in to evaluate the health of a science? If we only rely on insiders to evaluate their own field, we are certain to run afoul of vested interest (If someone asked you "How valuable is the work you do", what would you say?). But outsiders often lack the relevant expertise to judge someone else's field."

Ultimately, the hallmark of good science is that it can be used to make accurate predictions or useful devices. Economics remains an abject failure on that front, along with the science of earthquake prediction and many other forays into complex systems. Nate Silver has a good discussion of fields where predictions have been successful and where they have failed in his latest book. That's the kind of standard I would use to judge the success of any model, science or theory. The "proof is in the pudding" standard.

The fundamental problem remains that most of major underlying assumptions of most economic theories are unrealistic or just plain wrong. Thus, what you end up with is a modern form of scholasticism that is heavy on logic and high-brow academics and light on practical meaning.

But perhaps there is a possibility of a new beginning. Its going to have to start with assumptions based on Kahneman & Tversky observations about real economic behaviors and a rejection of purely "rational actor" models to become something useful. And its going to be a slow-going slog for awhile.

Trouble is, that means that large amounts of text and the life's work of many are going to end up in the dust bin. As Planck aptly observed, bad or wrong-headed ideas in science don't really die out until their proponents keel over. Very few can rise to reject what they have spent so much time on, preferring consistency to truth. As usual, Emerson has something to say: "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines." Yet that is the state of mainstream economics today.

This. ^^ Especially the "most of the major assumptions are unrealistic or just plain wrong" and "modern form of scholasticism". Already in the late '60's my mother was wondering whether she could bite her tongue long enough to get a Ph.D. in a field where her twenty years staying home and raising children was defined as 'leisure'. It's just gotten worse sense then.

First, Steven has been predicting massive inflation (if not hyperinflation) for a few years now. Krugman has been pointing out using standard economics while this is wrong.

At this point Steven is a liar or a fool or an ignoramus; taking his advice as to the state of macro is like listening to a creationist talk about biology.

Second - Krugman seems to think that much of macro is FUBAR, and he has the chops to be right.

Third - the critiques of macro in the Crash are not those of prediction, but of (a) under the advice of economists, we restructured our financial institutions to be more unstable, when the sources were known from history, and (b) after the Crash the most elite school of econ was flat-out wrong, to an extent which can not be ignored.

Noah: learn Institutional Economics. It kind of died out in the 50s, but it's the field which tries to explain why Kellogg Brown Root remains rotten and criminal no matter who buys them or what field they go into, while Berkshire Hathaway is straightlaced and honest, no matter who buys them or what field they go into.

Institutional economics is all about analyzing institutional culture as a cause of behavior among major economic players, and of course analyzing what causes the institutional culture: it's the only economic field which can fully explain what went wrong with the economics profession. :-) It's not fully developed.

Game theory economics has two branches: the theoretical, which is somewhat useful; and the experimental, which is EXTREMELY useful. If you value your career research the experimental game theory results, they are really really valuable in describing actual human psychology when it comes to money. I mentioned some of the more impressive results in another comment. It's veering into behavior at that point, of course.

The neo-Keynesians recommend using all the tools available to manage an economy, Monetary policy, Fiscal Policy and Regulatory Policy. Neo-Classical economists are dismissive of fiscal policy and want to find ways (no matter how convoluted) of only using monetary policy as an economic management tool. This is clear from the utter disdain that some economists loudly show for fiscal and regulatory policy.

The problem for them is that monetary policy is not implemented in a vacuum. Monetary policy is implemented in an economy that is structured by fiscal policy investments under a set of Enforceable Regulations. There is no "Free Market". There are only Regulated Markets. Monetary policy, no matter how good simply cannot compensate for Regulatory and Fiscal Policy that are not good enough. The policy debate has one side claiming that fiscal and regulatory interventions will only make matters worse and that Monetary Policy alone always rules. Never mind that monetary is demonstrated to be impotent for stimulating demand at the ZLB. Never mind that Friedman's idea, "Monetary policy was responsible for the Great Depression" has been proved wrong in the Great Recession.

The economists of future will focus on better ways to implement fiscal policy such as more automatic stabilizers, infrastructure banks, supplemental purchases of goods and services &c and regulatory policies that do a better job of more equitably distributing wealth and prevent and deflate bubbles. The Monetary Policy Only idea has proved inadequate. The need to get more tools out of the shed is obvious to everyone but the old NeoClassical dinosaurs who have so much time and effort invested in their failed models that they cannot abandon them.

"Neo-Classical economists are dismissive of fiscal policy and want to find ways (no matter how convoluted) of only using monetary policy as an economic management tool. This is clear from the utter disdain that some economists loudly show for fiscal and regulatory policy."

This is because neo-classical economics is an excuse for right-wing plutocratic/kleptocratic policy. The *purpose* of neoclassical economics is to support policies which prevent the government from giving money to poor people, and encourage the government to give money to rich people. I dare you to find a counterexample.

Noah, you've comprehensively missed the point. Go back and re-read Cosma Shalizi's comment at DeLong's that started this whole thing.

The plain facts are that senior academic economists advocated austerity in the face of a serious drop in aggregate demand. This provided cover for the Euro zone and the UK to embark on programmes of austerity, needlessly causing great distress to hundreds of millions, and needlessly contributing to the deaths of thousands or tens of thousands.

Yet these senior academic economists have suffered no penalty whatsoever. They have not been disbarred from the AEA, they have not been required to resign their professorships, they have not been required to write mea culpas.

Amen! Three prominent economists, Mankiw, Taylor and Hubbard all advised Prez Bush-II at some point in time. The central question is whether they failed as advisers and if so, why has no apology been forthcoming. If economics is to be taken seriously as a 'science' then one must fess up when one is wrong! (and of course Cosma Shalizi, who grew up next door to me, also is schooled as a physicist sharing that with Noah)

Noah, the rotteness has a lot to do with the rational expectations hypothesis (REH) and the EMH, which are two formulations of the same approach. These preclude the fundamental uncertainty under which a modern macro-financial system operates and lead us to ask the wrong questions. We keep on fretting about shocks and prediction even after witnessing a major endogenous breakdown of the co-ordinating capacity of the whole system. So we could start by throwing those away and try understanding the macro-financial system with disequilibrium and/or a different kind of equilibrium concept (as advocated by Sargent, for instance).

The models will look less nice, tractable and general at first, but after a while we will probably be much closer to understanding reality.

Weirdly, I dislike REH but I like the EMH a lot. The EMH can be approximately true even if REH fails catastrophically.

Note that the EMH just says that all info is incorporated into stock prices. There may still be room for lots of other stuff, like sentiment and wrong expectations, to also be incorporated in. As long as that other stuff can't be observed and predicted outside the market, then the market is still unpredictable even though it has excess volatility.

Well, yes, but approximately true some of the time is probably not worth very much when discontinuities abound and the failures are catastrophic. I don't think the equilibria are stable in markets of any complexity and the tail risks still defy accurate description.

Well, there are many, but the presence of ex ante predictable positive risk-adjusted excess returns is a good one (it requires a model of risk to test).

Note that I think the EMH is always and everywhere false, but usually a good benchmark. The EMH is not quite the same thing as Newton's Laws, but remember that Newton's Laws are also incredibly useful as a benchmark even though they're formally false.

Basically I think the idea of zero-profit financial markets is always a good starting point (not ending point) for analysis.

Well, yes, but approximately true some of the time is probably not worth very much when discontinuities abound and the failures are catastrophic. I don't think the equilibria are stable in markets of any complexity and the tail risks still defy accurate description.

Agreed, agreed, agreed, and that is why I study bubbles for my career!

Whe the underlying assumption is that perfect information is a reality, the empirical rigour underlying the hypothesis is effectively destroyed. Take a look at Fama's New Yorker interview from 2010. There's no room in his mind for questioning assumptions, insteead he attempts to revise the entire GFC to preserve his baby.

Not only does perfect information never exist, most market participants have nothing even *approximating* perfect information. That's the first fatal flaw with the "efficient markets hypothesis".

The correct hypothesis is "most people will not bother to spend the time doing the research on any given product or business or market, and therefore those who bother to do the research will make out like bandits relative to everyone else". There's a lot of evidence for THIS hypothesis, which I call the "smart people make money" hypothesis.

"Note that the EMH just says that all info is incorporated into stock prices."

I don't see how this is a useful hypothesis. Suppose that Elon Musk knows everything there is to know about Tesla Motors, and so when he trades Tesla Motors stock, that incorporates information into the stock price for Tesla Motors.

However, suppose that there are a lot of other ignorant people trading Tesla Motors (there sure are). Their trading will swamp the effect Elon has on the stock price, meaning that the information incorporated into the stock price has a tiny effect on the stock price.

You really can consistently make money by figuring out the "true" going concern value of a company -- the discounted cash flow -- and buying the stock when it's significantly below that. Value investing works.

"but the presence of ex ante predictable positive risk-adjusted excess returns is a good one (it requires a model of risk to test)."

It exists. Just ask Benjamin Graham.

*Even though it works* the number of value investors does *not* increase until it stops working, because analyzing the true going concern value is very hard work even if all the underlying data is public; the analysis is a pain and the corporate execs attempt to make the information as obscure as possible.

Even Warren Buffett has screwed up (not spotting the shenanigans at General Re, for instance). People underestimate how much public information is just ignored by most people due to limited attention span.

If you have a deal between two experts in a field, *that* price may be an "efficient" or accurate price.

Hi Noah,Is this the Stephen Williamson, founder of the Balfour Williamson & Co of Liverpool?

Not the Williamson, who attempted to pull rank (unadvisedly) over a John Quiggin ("John Quiggin is not a Macroeconomist...." or something to that effect)?

So he is "85% right" eh? And Krugman is "15% right". Krugman is about 100% right (and he is not too keen on being the "correct package" for political appointments. His contribution to policy slant is enormous though, and one can only wish that Washington would take his prescriptions verbatim.)

And, yeah, I know you've heard it before. There's good reason for that.

Being a Christian socialist and thus of a firmly differing opinion about many things economic, I'd point out, gently, that the New Testament pretty much condemned capitalism, though that's what the real name of the religion of macroeconomics is, it seems to me.

In the sense that "even a stopped clock is right twice a day," I find it interesting to note that von Mises concluded that Christianity is socialism and rejected it on that basis. There isn't much modern economics has to offer that I otherwise find insightful (for lack of a better term). I see a lot of attempts to state the obvious, and getting it wrong even then...

If it's any consolation, my field is also deeply divided, but between academic and professional practice, not just within academics. I don't quite think I'd call either of its camps religious in the same sense, but, as you say, I could be convinced otherwise.

I agree with that assessment of the current state of economics as essentially a religion -- particularly at the popular level of discussions where most people asserting arguments are not even aware of the assumptions required to support them, and that their models are not real.

One of the key tip-offs is the prolific use of the word "faith" by politicians and others -- in in "faith in free markets", "faith in socialism", [or insert your favorite theory]. Then everyone spends time cherry-picking data and constructing narratives about broken windows and other things to support their faith.

Another clue is that most leading proponents are essentially priests of dead prophets -- Keynes, Hayek, Marx -- again, take your pick. (There's a reason why someone can make a YouTube video of a Keynes v. Hayek rap and have it resonate at a visceral/belief level.) All the priests do is add math and rationalization.

The danger here is that, like proponets of theocracy, economists are essentially utopians promising innumerable benefits to the entire society if their prescriptions are followed. Historically, following utopians leads to dystopias, and eventually societal breakdowns or revolutions. Following any one economic theory with passion is likely to lead to the same result.

"economists are essentially utopians promising innumerable benefits to the entire society if their prescriptions are followed."

Look, maybe you got a bad grade in ECO 1 or something, but this does not excuse your misrepresentation of facts. Economics has been called "dismal science" for a reason, clearly not for promising "innumerable benefits" but rather for highlighting the hollowness of such promises.

Ad hominem attacks are never very valid nor convincing. But if I tell you that I have a degree in economics from Caltech, would that change your mind? And if your school was not as prestigious, does that mean we should ignore what you have to say? Or can we stop the nonsense of personal attacks and focus on ideas now?

When economists start saying "I'm not sure what we should do or what the outcome will be, but here are some divergent ideas and the theories behind them, along with some historical examples", then I will stop labelling them as utopians. But there are no academic prizes or public fame in admitting self-doubt.

When you take a break from playing victim, can you please point out the ad hominem attack? I am merely trying to figure out what personal issues would cause you to make such outragously false statements.

Most economists spend their time pointing out to utopians of various types (socialists, libertarians, etc.) the flaws in their plans to create heaven on earth. This is why economics has been called the dismal science. No well-intended student of economics would turn facts on their head like you did. My colleagues who hold a Caltech Ph.D. know this. Oh, and I am pretty sure at least some students do get bad grades at Caltech.

"When you take a break from playing victim, can you please point out the ad hominem attack? I am merely trying to figure out what personal issues would cause you to make such outragously false statements."

Erm, it's there? Assuming he has 'personal issues' because he disagrees with you.

"This is why economics has been called the dismal science."

Well, actually, the real reason is sort of the opposite - it was because economists were arguing against slavery.

"Well, actually, the real reason is sort of the opposite - it was because economists were arguing against slavery."

Yes, so how does arguing against slavery show that the statement was about the opposite? In context, Carlyle, who coined the phrase, was arguing in favor of regulating the labor market in West Indies (reinstating slavery was just the means). This is no different that people who argue that poverty can be solved by minimum wage laws, homelessness can be solved by rent controls, and so on. Most economics is concerned with pointing out that there is no such thing as a free-lunch, that these policies have unintended consequences that are often worse than the problems they are trying to tackle, and that, in general, there are no magical solutions. And every time we do, we get attacked for the same reasons that motivated Carlyle. Any student who has taken economics should know this! So you tell me, if someone who claims they have studied economics comes out and says the exact opposite, what am I to conclude?

A) They had a very bad teacherB) They were a bad studentC) They have a beef

"Another clue is that most leading proponents are essentially priests of dead prophets -- Keynes, Hayek, Marx -- again, take your pick. (There's a reason why someone can make a YouTube video of a Keynes v. Hayek rap and have it resonate at a visceral/belief level.) All the priests do is add math and rationalization."

You are aware that the only people who think any of those videos are worth watching are noneconomists, right? The obsession with dead thinkers is something that only resonates with people who expect to or want to treat economics like the humanities, where one can consistently publish about what Marx (or Foucault or wheoever) REALLY meant. You won't find a Keynes vs. Hayek debate in any journal worth reading.

As an actual practicing economist, I would like to ask CA to stop making us look bad. I mean, you could come up a more embarrassingly contradictory pair of statements than "When you take a break from playing victim, can you please point out the ad hominem attack? I am merely trying to figure out what personal issues would cause you to make such outragously false statements," but it would take some work.

"So you tell me, if someone who claims they have studied economics comes out and says the exact opposite, what am I to conclude?

A) They had a very bad teacherB) They were a bad studentC) They have a beef

If you have any other explenation, I am happy to hear it."

They *rejected* the explanations offered.

"Yes, so how does arguing against slavery show that the statement was about the opposite?."

I'm saying arguing against slavery is acknowledging that moves can be made to improve the lot of large numbers of people. I wouldn't say this is in the same vein as your seeming preference for 'harsh but realistic prescriptions.'

I'd also like to take issue with this:

"Look, maybe you got a bad grade in ECO 1 or something, but this does not excuse your misrepresentation of facts. Economics has been called "dismal science" for a reason, clearly not for promising "innumerable benefits" but rather for highlighting the hollowness of such promises."

Many economic theories talk about maximising social welfare. In fact, it is only the selectively interpreted neoliberal brand of economics that really says not everyone can be relatively well off.

Rejected which explanations? Real or imaginary ones? If they rejected the first I have no problem. My problem is that they substitute the first with the second.

John Stuart Mill's response was that reinstating slavery was not a solution to the problem Carlyle was trying to address. No free lunch!

Social welfare has a very precise definition: It is defined as economic surplus. But economists quite often (see for example Mankiw's "Principles of Economics") point out that there is a trade-off between maximizing social welfare (as defined) and pursuing other worthy social goals, like reducing inequality. Economists cannot say anything about how much one should pursue one goal over another, as this involves value judgment. Economists CAN help point out such trade-offs when they are not immediately apparent, and measure the cost of alternative policies that achieve the same outcome so that policy-makers can pursue whatever goal they deem worthy while imposing the smallest possible economic cost. Examples incluce "cap and trade" instead of setting pollution limits for each plant, government-funded school vouchers instead of ONLY public schools, taxing bads like gasoline instead of goods like income, voluntary army versus conscription, etc.

This is the exact opposite from what you say. Economists are not promising innumerable benefits. If anything we are suggesting that such promises are void and usually dangerous. What we are saying is that better-designed policies can make life somewhat less miserable and create an environment that will encourage medical doctors, engineers, entrepreneurs, and others act in ways that improve our lives. They are the ones we look up to for "benefits", while remaining aware that such benefits are usually limited, not innumerable.

You misdefined social welfare. The correct definition of social welfare is something like median standard of living. Lying about terms is a standard method of right-wing manipluation and one which is particularly popular in right-wing economics indoctrination..

CA, nearly every thing you talk about is a big pile of lying shit. (There are a few truths tucked in there, like that cap-and-trade works.)

I learned all of that crap, and the key is that *most of this is actually not true*. Voucher systems for schools do not improve GDP or equality. Income is not necessarily a good, because very high incomes for a few people cause a massively distortionary political effect. (And don't get me started on the "keeping up with the Joneses" effect.) A Volunteer army is not necessarily a good, because it makes it easier for the leaders to go to war.

As Unlearning Econ, who knows 10 times more econ that you do, has pointed out, "In fact, it is only the selectively interpreted neoliberal brand of economics that really says not everyone can be relatively well off."

You clearly did not learn any of "that crap". In undergrad econ we measure social welfare through consumer and producer surplus (the area between the demand and supply curves, ya know?). You clearly were not paying attention.

So school choice (including charter and magnet schools) is bad, and conscription prevents leaders from starting wars (you mean like Korea and Vietnam). Some empiricism!

It is one thing to argue that we do not have all the answers, which is what you are saing, than to argue that we have answers but the big bad "freshwater" cult does not let them be heard. This is the argument Krugman is making, and with which both Williamson and I disagree.

As for the rest, the fact that nobody talks any more about an unemployment-inflation trade-off, at least in levels, is progress, and is in large part due to Friedman and Lucas. The increasing effort of central banks to influence economic activity through forward guiidance and the use of nominal anchors is due to Lucas, Kydland, and Prescott. And the targetting of interest rates rather than monetary aggregates is in large part due to Minsky, a Post-Keynesian (to which bad "mainstream" economists allegedly pay no attention...except when they actually have something interesting to say).

Not trying to exploit an inflation-unemployment tradeoff is good, but is this really due to modern macro? I had thought that Friedman's ideas basically covered that, with the NAIRU, long-run and short-run Phillips curves, etc.

But yes, "do no harm" is a valuable contribution. No policy is better than doggedly sticking to bad policy...

Well, why does the starting date have to be 1972? The 1960s were a very productive decade, why throw it out?

In any case, the use of nominal anchors that helps reduce the sacrifice ratio during disinflation is due to Kydland and Prescott (1977). But you also miss that after 1980, perhaps as a result of the great moderation, macroeconomists turned some of their attention on issues of growth and development. So yes, business cycle research produced fewer big ideas, but we have some pretty significant contributions in the 1980s and 1990s regarding what drives lon-run growth and why standards of living differ accross countries.

CA, the "research" about long-run growth in the 1980s appears to have mostly been wrong. Are you thinking more of the late-1990s material, the part which said "the World Bank is full of shit"? There was some good stuff there.

"This isn't some "cult that has taken over half the field," it's some cult which has taken over all of thefield"

I really have nothing to type but "What Noah Said." The fact that models are similar to each other is a bad thing if they are completely unlike the reality we tried to model.

Williamson mistakes OK math* for science. He just assumes that the field can't be all messed up. He should try to respond to my challenge to find a theoretical development which is demonstrably empirically useful and not in "The General Theory..." If he manages he will be the second (Bearl Means and Robinson got a shout out for Keynes just mentions administered prices in a "to be sure" aside).

*Not OK in the sense it could be published in a math journal but OK in the sense that it could be published 50 to 100 years ago in a B-list math journal.

"He should try to respond to my challenge to find a theoretical development which is demonstrably empirically useful and not in "The General Theory...""

I can't give you one in current *macro*economics. I can't give you one in neoclassical microeconomics, either (I'm not sure they have discovered anything that wasn't in Adam Smith, for goodness' sake.)

I could give you a few in environmental economics.

Or a few in microeconomic experimental game theory. The result that people care about fairness more than about profit under most circumstances is really important. The limits on that are also really interesting -- there's a "too small to matter" amount of money, where people don't even bother to calculate, and there's a "too much money" level where people do become greedy. The differing cultural definitions of "fairness" are also a very interesting set of results.

None of this has percolated into "macroeconomics". Though it damn well should have; fairness is at the core of our current economic problems -- and so is the ability to make obscenely large fortunes through fraud and theft.

If a bridge designed and built according to current engineering practice fell down, a layman would have little trouble in fairly concluding that there was a problem with engineering.

When a ship goes on the rocks, the passengers can fairly conclude the captain was an idiot (or worse).

When economies go "kablooey", laymen can fairly conclude that the people with their hands on the tiller were idiots (or worse).

When a discipline says: "we have theories but the really interesting stuff is just the result of random external shocks which we do not understand", a layman can fairly conclude that the discipline needs an overhaul.

Economists act as enablers for feckless politicians and reckless bankers - and the profession needs to take collective responsibility for that.

When economies go "kablooey", laymen can fairly conclude that the people with their hands on the tiller were idiots (or worse).

Maybe, maybe not. We don't blame seismologists for earthquakes, nor do we blame them for failing to predict earthquakes accurately years in advance. Same with meteorologists and hurricanes. Complex systems can be chaotic, and chaotic systems are often violent and unpredictable.

The difference is that seismologists and meteorologists recognize their limitations, they know (and actively study) the reasons for their limitations, and they admit their limitations in public.

OK so the system is chaotic - so is the three body problem but astronomers still do their thing. Air flow and combustion are generally chaotic but jet engines work and airplanes do not fall randomly from the sky.

Noah, the real fundamental difference is that seismologists cannot influence earthquakes. But economics can, and does, influence the economy. I do agree with the other difference you mention, but it's secondary. Oh, and BTW, Italy *does* blame seismologists for failure to predict (while the ones ruining their economy go free.)

"Maybe, maybe not. We don't blame seismologists for earthquakes, nor do we blame them for failing to predict earthquakes accurately years in advance. Same with meteorologists and hurricanes. Complex systems can be chaotic, and chaotic systems are often violent and unpredictable."

This is the dishonest excuse, Noah (I'm not blaming you, since it's part of the field by now).

The real critique is that (a) deregulating financial markets let to a massive and historically-predictable crash, and (b) once the crash had happened, freshwater economics was wrong, persistently wrong and ignoring-facts wrong about it.

>We don't blame seismologists for earthquakes, nor do we blame them for failing to predict earthquakes accurately years in advance. Same with meteorologists and hurricanes. Complex systems can be chaotic, and chaotic systems are often violent and unpredictable.

IMO Absalon's analogy is misspecified. A better analogy is the one you gave above---it's also the same justification given for why economists shouldn't be blamed for not predicting the crisis. We don't blame seismologists for earthquakes, nor meteorologists for hurricanes because as you mention, the systems they deal with (at least to my knowledge with weather) are chaotic systems. It's simply impossible to predict. If economic systems are a chaotic systems, then the same principle applies.

However, here is where the analogy breaks down:If seismologists or meteorologists were calling for 'the great moderation' in geological activity or weather, and if a cataclysmic event did occur, we would be right to blame them for failing to 'predict' (at least the direction). Similarly if economists were describing the 'great moderation' and if the current models or theory do not have severe events as a possible outcome, we are right to blame economists were not predicting a crisis.

When highly regarded professors (Cochrane, Fama ..) are advocating austerity etc in the face of a severe recession (convenient for their conservative backers) and then not acknowledging their mistakes - how does that make for anything but an unhealthy field.

That's a good question. I think economist's opinions are generally more leftist than the general public thinks, but also more conservative than other social sciences.

The question, however, is not one of particular beliefs but of a way of thinking. Do mainstream economists use similar arguments when challenged about their beliefs that those such as Fama use? Personally, I'd say yes, no matter how leftist the economist. Krugman is one example.

"If someone asked you "How valuable is the work you do", what would you say?" Well if it's theory, then I (repeatedly) say it's worthless. This might explain why journals no longer publish it. My empirical efforts are not quite so bad, but nothing to write home about (I don't). My efforts in mathematical statistics are I think original (still after all these years for all I know) but useless as they are tools which no one uses.

I unsurprisingly call the Smith Wren_Lewis debate for Wren-Lewis. As you note, the Taylor rule was a description of existing policy. It preceded the theory and didn't follow from it.

Also the great post war boom was better than the great moderation. No one ascribes it to excellent macro theory anymore (although that view was very common at the time the theory being in "The General Theory ..." Overall macro performance has been rotten in recent decades. Picking the OK years and ignoring the rest doesn't cut it.

Oh finally, are we really so ignorant? What causes recessions ? I'd say one of three things1) the monetary authority decides to cause a recession to fight inflation2)Especially if the high inflation is associated with an Oil shock which temporarily causes low demand as exporters figure out what to do with the money.3) there was a bubble and it burst -- Stock in 29 and 2001 real estate in 90 and 2008.

This leaves a lot unexplained. Why were 2001 and 90 so mild compared to 29 and 2008 ? Hmmm might have something to do with regulating banking then inventing shadow banking.

But the problem is that bubbles are absolutely banned by DSGE (often by ad hoc assumptions beyond rational expectations which are needed to rule out sunspot equilibria). So macroeconomists as macroeconomists understand less than average guys (including the macroeconomists when not at work).

Krugman is an economist. Krugman understood what was going on. An economist understood what was going on.

Yes, there were economists who knew what was happening. Those who called the GFC years ahead of time ( Wynne Godley, Warren Mosler, Steve Keen) continue to be ignored despite having models which exceed the predictice capacity of mainstream frameworks. Krugman has been all but marginalized: while he's still technically in the mainstream his ideas now put him on the fringes, particularly since he got bitten by the MMT bug earlier this year.

I notice that the 'Great Moderation' also coincided with (a) OPEC losing power, (b) the Fed demonstrating that it'd happily kill the economy to save it (Volcker) and (c) the gains from productivity going almost entirely to the top few percent of the population.

And Krugman has pointed out that if you look at per capita productivity growth and economic growth, this period doesn't look so hot.

"Economic science does an excellent job of displacing bad ideas with good ones. It's happening every day."

He's got to be kidding hasn't he. Has he got windows in his ivory tower? It seems to me, that to some extent, it is happening exactly in REVERSE (bad ideas displacing good ones - where "good" is based on pragmatic virtue).

With respect to the Phillip's curve - the Phillips curve was abandoned not for theoretical reasons (although there are good theoretical reasons) but because it failed empirically in the 1970s.

Your should read Friedman's presidential address to the American Economic Association where he debunks the Phillips curve.http://stevereads.com/papers_to_read/friedman_the_role_of_monetary_policy.pdfThat was in 1968, not in the 1970s!!

No, but when their policies failed they had an explanation of why they did so. Is this not a contribution? I really can't understand what you are blaming economists for. Because policy-makers don't listen to them? Because theories are abandoned only after the data do not conform with them? Isn't this how all sciences deal with competing theories?

I'm not convinced that the "great moderation" was the "great moderation". It was a great moderation in terms of some measured (and targeted) variables in some parts of the world. But the private debt/GDP was rising increasing sharply, the profit/wages ratio was rising, inequality was rising and obvious asset bubbles were becoming more frequent. Some financial measures were becoming increasingly volatile (and there were unpredictable potential insolvencies building up with the huge increase in outstanding derivatives contracts).

I have my own Lucas critique - any PROXY target will become increasingly divorced from the real target over time.

I think you make the point well. Private debt was increasing at an unsustainable rate of 7% per year, but the loanable funds framework said households could not become overly indebted so this was ignored.

The FBI warned in 2004 regarding an "epidemic of mortgage fraud", but conventional wisdom said markets would clear fraud from the system on their own, so this was ignored.

We've seen asset bubbles growing in magnitude for the last thirty years, but the EMH says bubbles of any significance are impossible, so this was ignored.

Any field in which we have 80 years of data and yet there is still no consensus on the most basic points is NOT a science.

I take it CA is a theorist, because he seems totally immune to the idea that empirical experience may have influenced the paradigms that central bankers use, rather than theory. As Robert Waldmann would say, you can find a theory to say almost anything - which one you choose to use, may be influenced by experience.

Empirical experience also influences theoretical research. How do you think theorists in all disciplines pick their research topics? So what is your point? Public infrustructural spending used to be countercyclical way before Keynes ever wrote anything on economics, does this mean that his writings were inconsequential? Economic theory can justify what policy-makers are doing, or can invalidate it (e.g. their attempts to exploit the unemployment-inflation trade-off). And, yes, in some cases it does lead to new policy tools (e.g. nominal anchors).

As for myself, the majority of my published work is empirical. Can you stop being wrong for a while?

P.P.S.In case CA wants to pull the "I know what I'm talking about and you obviously don't caper again", I have an economics degree and worked for some time as an economist at a central bank. (Yes that was a long time ago, and I earn my pay in a more respectable way now.)

I'm not going to tangle with CA about econ, but if he isn't a lab specimen of the near-autistic arrogance of economists, I dunno who is. And it's a truism that that hubris has a lot to do with the "esteem" that economics has earned.

**Everybody** who has doubts about academic econ got a bad grade in an undergrad course and/or is a loser? Everybody?!?! Jesus, who wouldn't be impressed by all the **empiricism** there...

First of all, using the word "autism" as an insult is offensive to many people who are close to a person suffering from autism and can testify to their brilliance if raised under proper conditions. But how would the group of jerks who use this term understand that.

Secondly, you are, conveniently for you, responding to a strawman. It is not about doubting academic econ, it is about misrepresenting it. For example, if you argue that economics teaches that imposing price controls is a good way of increasing the availability of goods you are either a bad student or a liar. This is irrelevant as to do whether economic theory is correct. It is simply a counterfactial statement, since rightly or wrongly this is not what economics teaches! You can criticize econ all you want, but critisize it for what it really says, not for what you think or wish it says, kinda like you are doing with me right now.

@Noah 9:42a. Economists like to pretend they are not dealing with a chaotic system. If the system is really chaotic and they claim it is not, then they are also culpable for that.b. Seismologists may not be able to say when and exactly where an earthquake will strike, but they give probability estimates. Given the forces that were building in the economy (and that some where warning about it - e.g. Dean Baker, Paul Krugman), denying that such warnings are possible is also culpable behaviour.

Though I'm a botanist, I've been reading a lot of economic punditry since 2010, just to get a sense of how things went wrong. I think a biological insight will be helpful -

Biologists have very ambivalent notions of 'medicine' & 'poison'. Unlike lay men, for biologists the distinction is not always clear cut. The first principle of toxicology is - "What differentiates a medicine from a poison is not the (chemical) nature of substance itself, but the dose (and duration) administrated". Underdose doesn't help, overdose can kill. Only the recommended dose for recommended period is helpful. Many of the medicines (like sedatives) are habit-forming "drug" taken beyond recommended dose and/or duration. This is the main point economists need to grasp. So, coming to economics, the point is that fiscal expansion can be necessary at ZLB, but must be phased out once economy has recovered, Fiscal consolidation in boom, stimulus in slump - seems like a medicine. The opposite seems toxic. So Keynes appears to be right - "Boom, not the slump, is right time for austerity at treasury".

Amit, it is a bit more complicated than that. For example, how do you pay for the expansion? Do you raise taxes now? Do you raise taxes later? Do you pay for the increased spending now by cutting down future spending? Moreover, what kind of things do you spend on? Is it OK to pay people to dig holes and then fill them up again (as Keynes argued)? Why not pay them to stay at home then? These are the details being debated among economists. Unfortunately the layman cannot see that it is not as simple as being Keynesian vs. being non-Keynesian. There are a lot of important details that need to be considered.

See, terms & conditions do apply. By default,"stimulus" means "doing/building useful things". Case for "stimulus" is highly specific - it is applicable when and only when central bank fails to stimulate economy at 0% rate because bubble has burst (to reach that stage you need financial deregulation & most incompetent central banker i.e. Alan Greenspan)& people are busy paying off their debts leading to a demand shortfall.

The real debate should be "what to spend money on" & not on "to spend" or "not spend".

Now, what to spend money on. Read Joe Stiglitz 'Book of jobs' His ans, which I agree with, is- Prepare people for jobs of future.

During Great Depression, most of US population was in farming sector. Wartime spending facilitated transition to industrial/manufacturing. In Lesser Depression, hope in manufacturing is limited thanks to foreign cheap labor & robots. The jobs are in service sector. Facilitating this transition, building infrastructure is the way to go.

And then there is financial regulation issue. As Stiglitz notes "When you tax capital gains at half the rate of others, you encourage speculation. And so you divert resources to speculative .... rather than into creative activities" (http://www.northjersey.com/news/business/141149483_Economist_says_wealth_gap_is_bad_for_growth.html?page=all )

And Keynes was not *advocating* paying people to dig holes and fill them as you make it out. He made the theoretical point that in a severe slump it would be better than nothing to do so. Correct me if I'm wrong.

raising taxes is contractionary, but the timing of doing so (raising them now versus borrowing now and raising them later) may or may not matter depending on whether the Ricardian Equivalence holds. I personally think there are good reasons why the RE does not hold, but it is a theoretical possibility behind much of the debate over the effectiveness of stimulus spending.

Keynes indeed did not advocate for paying people to dig holes, but he did say it would be preferable to doing nothing. Do we accept this proposition today? I don't! Standard economic theory says that rather than paying people to produce things we don't need it is better to pay them to stay at home and at least do the things they like to do.

Which brings us to the final point. If the government does spend money on producing things we would want to produce anyway, then why call it stimulus? If infrustructural investment has a high social return we should defend it on its own merit regardless of whether we are in a recession or not. If a bridge is worth building in bad times it should be worth building in good times. Clearly it would be cheaper to do so during bad times (when the cost is lower) but it is not clear that this is the typical Keynesian stimulus people have in mind. This was Cochrane's argument.

The problem is that once you decide to produce things that are, in fact useful, you lose time in deciding what these things are, and this reduces the effectiveness of your fiscal policy in stabilizing the business cycle. Thus Krugman was arguing in favor of spending now, asking questions later. Well, for reasons I mentioned not everyone agrees with that.

I appreciate your response, thanks. But it seems to me that you are resistant to seeing the simplicity of the argument. We agree that if we're going to spend, let's spend on something useful. If the 100% optimal choice takes too much time to determine then let's settle for the 85% optimal choice and get it going asap! Is this an affront to good sense?

And aren't all the VSP's wringing their hands over the fiscal cliff conceding Keynes case?! Seems pretty bloody obvious to me they are.

I supported the American Recovery and Reinvestment Act, so you are talking to a team member. But on what is good sense, is 25% waste OK? Why not 40% or 50%? How do we make a choice? I think economists have an obligation to point out that there is waste, figure out how big it is, and then let the American people decide how much they are willing to tolerate. Some voters, including Krugman, may be willing to accept higher waste, other voters, including Cochrane, may have lower tolerance. To me this is fine, and doesn't make Krugman or Cochrane a bad person. But both of them, as economists, have an obligation to work objectively on getting the facts straight, which of course is not easy.

The are two more points I am trying to make.

First, I would have supported an increase in infrustructural investment REGARDLESS of whether we are in a recession or not. The recession gives one more reason to do it now, but in my opinion the share of GDP spent on infrustructure is too low compared to what other developed economies are spending. I think we should be talking about that instead of just calling it stimulus.

Second, economists, being specialists, have a responsibility to pay attention to practical details so as to find ways to minimize the afore-mentioned waste. In a simple IS-LM model you increase G and get some positive effect on income through the government spending multiplier. In reality things are much, much more complex. For example, look at this paper by Young and Sobel (forthcoming in Public Choice):http://www.be.wvu.edu/div/econ/work/pdf_files/10-17.pdfThere are a lot of details to consider, including ones I mentioned in my previous comment, to ensure that what we are doing is as effective as possible. Our government finances its spending with the hard-earned income of its people. I think we owe them that much!

Finally, no need to thank me for responding. I enjoy interacting with people so long as they are well-intentioned and not here to throw anathemas. This is why I am not a big fun of Krugman's style (including his VSP phrase). He likes being combative and feeding his ego by painting others as stupid, evil, unworthy, and so on. Ask fellow liberals, like Robert Reich, who have suffered from his pen. I sometimes wonder how the heck he ended up being a liberal.

Brad has a link up to a paper on safe assets. In the paper the following comment is made:

First, we all fall into the trap of giving too much attention tosupply and not enough to demand. Second, we need to be narrow our focus and distinguish more carefully four concepts that have shaped our thinking in recent years, namely (a) measures of the time value of money, (b) references for value, (c) hedging of interest-raterisk, and (d) the base asset, or reserve asset, of the banking system. Third, in our analysis of “safe assets” we need to be much clearer about “safety from what?” – the different elements of risk that are always present in an asset. Fourth, much greater emphasis needs to be given to differences in investment horizon – both between different agents and across time. Think more about changes in demand. Ten years ago, when I was responsible for the U.S.Treasury’s debt management, I gave a speech about the long-run fiscal outlook in which I tried to draw attention to the U.S. government’s unfunded retirement and health care commitments and to suggest that more attention be paid to the actuarial position of thefederal government. (“Beyond Borrowing: Meeting the Government’s Financial Challenges in the 21st Century”, Nov. 14, 2002.) As gloomy as I was then, looking back ten years, I could not have imagined that over the next decade we would triple federal debt outstanding, the federal government would explicitly assume the liabilities of Fannie Mae and Freddie Mac as wards of the state, and we would see a vast expansion of unfunded federal health care liabilities through both the Medicare drug benefit and universal coverage in the recent health care reform and the result would be that yields on the ten-year U.S. Treasury security would fall from 4.05 percent at the time of my speech to well below 2 percent today.

Now, it seems to this observer that when everyone falls into a trap, then the state of Macro is pretty awful and that Krugman is correct.

CAI see you've learnt your manners from Steve Williamson.No actually, I just found working at a job where the answers were known in advance and I had to twig the model to give them, wasn't my idea of integrity. So I moved to solving real problems instead of just playing a game.

Where did YOU learn YOUR manners? Read your statement and think about what it means for those of us who are still earning a paycheck by practicing economics. You are pooping on our face, including Noah's who is making a living the same way. What do you expect?

P.S. Steve Williamson is too well-mannered for my taste, but then again, I am mediterranean.

Every economic theory I have ever heard starts with assumptions that are sometimes false. Add in all the math you want but it doesn't change the fact that a theory's prediction was probably more lucky (or unlucky) than logical. In that sense, macro is rotten because the majority of academic economist, having invested careers in learning and enhancing complex, elegant mathematical models won't discard them in the face of clear evidence it doesn't fit the current circumstances. The cult is a cult of certainty where none exists. I suspect if we started fining economists (in real dollars as a percentage of wealth) for incorrect predictions, macro would be healthier and more useful field. How is that for using economics to cure economics? Ironical, no?

"The lectures that my wife helped shape into this book were delivered a quarter of a century ago... those of us who were deeply concerted about the danger to freedom and prosperity from the growth of government, from the triumph of the welfare-state and Kenysian ideas, were a small beleaguered minority regarded as eccentrics... Even seven years later, when this book was first published, its views were so far out of the mainstream that it was not reviewed by any major national publication-- not even the New York Times.."

In the short term, ideas are exceptionally subjective. I've faith in the economics profession to replace good ideas in the long term-- but I'd put the long term at a century, at least.

He saves his iciest hate for economists. Taleb has no use for the "charlatanic" field, comparing economic research to medieval medicine. Economists are, in his estimation, weak, ignorant, fearful, and generally pathetic. At one point he fantasizes about beating up an economist in public.

Wow, Noah- you're usually pretty sharp, but this dialogue comes across as though you haven't been paying attention to macro for the last decade (which I don't think is true, btw). The point that two schools can use the same techniques, however defined, but draw very different conclusions from them is elementary; the fact that the freshwater school (not the academics that "Krugman calls" the freshwater school btw-- pretty much everyone says that, it comes from Robert Hall in 1976, which makes it look like both you and Williamson are somewhat oblivious to the history of your fields)is contemptuous and dismissive of saltwater econ has become painfully obvious; the fact that freshwater is ignoring the disconnect between its own modelling and the proof that came out in the pudding of the great recession is even more glaringly obvious; and the fact that so much of freshwater is not even attempting rigor in its methods is if anything more painfully *and* glaringly obvious. You've kind of lost it on this one-- your point about same techniques is pretty irrelevant to the state of macro, your point about collegiality is just wrong, and many people, myself among them, would note that relying on Steve Williamson for anything is an automatic loss of credibility. I think you've lost the plot, and I think a lot of readers are losing a lot of respect for you on this one, because it smacks of intellectual dishonesty.

You've kind of lost it on this one-- your point about same techniques is pretty irrelevant to the state of macro, your point about collegiality is just wrong, and many people, myself among them, would note that relying on Steve Williamson for anything is an automatic loss of credibility. I think you've lost the plot, and I think a lot of readers are losing a lot of respect for you on this one, because it smacks of intellectual dishonesty.

Collegiality is more than being personable in person-- it includes engaging honestly with your opponents, and taking their views seriously. If you are truly saying that you haven't observed the derisive and dismissive behavior of many of the freshwater economists, or if you think it makes a difference that you've only read about them, but not seen them in person, then I think you're missing the point again. On the other hand, I don't think collegiality should even be the point-- honest engagement with ideas that disagree with your own, whatever the source, should be the point, and it's hard to ignore the overwhelming evidence that many of the big names in freshwater have abandoned that effort.

You posed the question about whether collegiality and similarity of technique are important indicators of the health of the field. I disagree on your interpretation of collegiality, but I agree with your larger question: "Or should we require a science to give us actual answers?" I think the answer is: we should require science to use the actual techniques of science in the pursuit of answers. This means adjustment in the face of evidence, it means relying on the outcomes of real experiments (natural or otherwise), it means adjusting your models and methods when proven wrong. It means not letting your politics define your outcomes. That is the crisis in macro, period-- your other points are fluff. And it matters to describe that crisis accurately; it matters a lot, because if we just get into technocratic distinctions, or just get into larger epistemological questions about "what is the nature of science," we're ignoring the fact that a lot of economists became (or revealed themselves to be) dishonest partisan hacks during the recent crisis, and it actually harmed us all. Why not just call that by its name?

On dishonesty, I don't think your initial point was intended to be dishonest at all-- but I think that your attempt to maintain it in the face of evidence is a case of fooling yourself. I'm not claiming you are being intentionally dishonest, but I think you're holding on pretty hard to a lost position.

If you are truly saying that you haven't observed the derisive and dismissive behavior of many of the freshwater economists, or if you think it makes a difference that you've only read about them, but not seen them in person, then I think you're missing the point again.

That is true, I have never seen that in any seminar (when, for example, Minnesota people would come to speak), or conference, nor was there any apparent hostility in my own department between the people who did freshwater-inspired stuff (Chris House, Jing Zhang, Rudi Bachmann) and the people who did saltwater-type stuff (Miles Kimball, Bob Barsky, Matt Shapiro). I do seem to recall that there was a bit of contentiousness between Bob Barsky and Randy Wright (a Williamson co-author). That's the only evidence of lingering saltwater-freshwater enmity I ever saw, and it wasn't much.

it's hard to ignore the overwhelming evidence that many of the big names in freshwater have abandoned that effort

Maybe so, but keep in mind that the "big names" you hear about - Lucas, Prescott, etc. - are old guys, mostly retired.

I think the answer is: we should require science to use the actual techniques of science in the pursuit of answers. This means adjustment in the face of evidence, it means relying on the outcomes of real experiments (natural or otherwise), it means adjusting your models and methods when proven wrong. It means not letting your politics define your outcomes.

I agree completely.

That is the crisis in macro, period-- your other points are fluff.

Well, OK, if you think so...

your attempt to maintain it in the face of evidence is a case of fooling yourself. I'm not claiming you are being intentionally dishonest, but I think you're holding on pretty hard to a lost position.

Wait...what is this "lost position", and what is the "evidence" that has come up against it? I'm honestly not sure exactly what you're talking about, so this is a serious question.

Can Costas Alexandrakis (CA) find evidence of "the mistaken idea that the Phillips Curve represented a stable, usable policy tradeoff between inflation and unemployment." Such a view is certainly contradicted by the classic paleo Keynesian Phillips cuve paper Samuelson and Solow 1960.

Macroeconomists agree that from 1960 through 1974 foolish old fashioned macroeconomists believed in a stable Phillips curve. The citations, such as they are, tend to lead to the legend of figure 2 in Samuelson and Solow 1960 with the necessary context removed. The 2nd full paragraph the after figure notes that the figure shows only a short term tradeoff since it does not consider the effect of inflation on expected inflation nor how cyclical unemployment can become structural (the phenonemenon Samuelson's nephew had yet to call using the pseudophysicsy term hysteresis).

I first heard of the stable Phillips curve when its death was announced. I'll believe people believed in it when I am presented with contemporary evidence that goes beyond statements to the effect that extremely low unemployment causes inflation to increase.

Also, by the way, Ptolemaic astronemers did not add epicycle after epicycle. There is no evidence of fiddling the model to fit the data over an interval of over 1000 years.

And for "serious economists" who advocated for exploiting such a trade-off, see Tobin (1972), especially the concluding section where he makes policy recommendations. Contrary to Friendman's warnings, The Nixon administration drunk the Kool-Aid, and tried to control the impact of expansionary monetary policy on prices by instituting wage and price controls. We all know how that went. Unemployment continued to rise, while the attempts to control inflation lead to shortages, as well as the inevitable.

"Taylor-type rules were originally estimated as Fed reaction functions, describing Fed behavior rather than prescribing it (later they became prescriptive when added to Woodford's New Keynesian models), so it seems that the Fed may have been behaving in the way it did in the Great Moderation well before New Keynesian models emerged to endorse the policy."

Very good. Opinion revised. The Taylor rule is actually an afterthought in NK models. It certainly does not fall out as an optimal policy rule, except with some slippery work and hard bashing. Woodford put it in there to get determinacy, and also as a marketing tool. We all want to sell out work, and Mike does an excellent job (e.g. in his book) of putting things in his models that don't really need to be there, but that people will recognize and like.

On another matter, what do you think Brad's problem is? He must have a "stupid Williamson" file that he hauls out when he needs it. I think he's one of those people who think I'm a Republican.

Being called stupid by Brad doesn't particularly distinguish you from the rest of the human race. What would he be like on a day-to-day basis? He walks around barking at people?

Yes, we Canadians are all socialists. In Canada, they switch the colours though. Red is Liberal and Blue is Conservative (that was called Progressive Conservative back in the day). Our family was red, except for Uncle Stan. He was a bit of a black sheep - NDP.

Actually, back to angry people. There are a lot of them over here. Seems you are in some trouble with your readership. Ignore them. They'll get over it.

Why the f*ck not? that's their attitude towards us. Time for them to drink from that cup.

I hereby give you permission to use the unedited version of the word "fuck" in my comments...

But anyway, I'm not a huge fan of this solution because the people waiting in the wings seem to be mainly either A) Austrians (shudder), or B) Post-Keynesians in the style of Steve Keen who seem to think you can predict the economy with a couple of simple ODEs.

"One of his major points is that the answers were known; Chicago quite deliberately discarded them."

1. It would be very nice if the answers to all our problems were known. You know Krugman can't be right if he goes on insisting the solutions are so easy, sitting under our noses.2. You make it sound like something wonderful was haphazardly discarded. Keynesian economics is hardly ignored or treated with disdain, though you may not like the criticism. Lucas treated it seriously enough to write a paper about it:

Steve Keen did predict the economy, when almost no one else did. I don't consider myself a post-Keynesian, but your comment about Keen was dismissive, rude and an indication you simply refuse to give credit due to some non-empirical dislike.

By the way, didn't you acknowledge in a comment a few months ago, where you advocated a tax increase in Japan, that you hadn't really paid much attention to post-Keynesian work? Did you recitify that with intense study since then?

I rarely comment here, but I'm standing up for Team "Who are you and what have you done with the real Noah Smith?"

Collegiality and similarity of technique are not measures of a field's health. They are measures of a field's "internal comfort"; how many of its everyday practitioners think that what they are collectively doing is sound and proper. It's a vague and loose form of internal validation, but it does not pass muster on any test of external validation of the work that counts.

The real-world tests that count were the GFC and its aftermath.

1. I don't believe the appropriate criterion is one of "accurate forecasting". I doubt we can precisely pick the day things will go south in a major way, but we ought to be able to do good risk assessment in advance and warn of the kinds of pressures that are building up and why they are likely to have bad consequences. I didn't see that happen much at all. I didn't see leading economists making loud cautionary noises.

2. What I did see was leading economists (you know, academic Very Serious People), after the crash, claiming that stimulus spending COULDN'T have expansionary effects, based on accounting-identity arguments. This was well documented on Brad's blog and elsewhere.

3. And now I see leading economists (you know, academic Very Serious People, some of whom have blogs now), argue for austerity, justifying it with fears of an inflation outbreak. Over and over, month in, month out, year in, year out, absent any compelling evidence.

The "old days" of Friedman versus Tobin (and Modigliani and Samuelson and ...) were in one sense combative and adversarial, but the premier battleground was the journals, and people behaved themselves. I wasn't there and didn't know them but I always got the impression that the combatants here were professionally respectful and personally cordial, if not friendly.

Now the journals simply avoid reflecting the combativeness (except sometimes the JEP), and the blogs are the battlegrounds, and people get nasty.

It's important to put in context the notion that for people like Williamson (and Andolfatto, and ...), normalising the profession's supposed cordiality and consensus is a means of normalising themselves, painting themselves as representative of the macro mainstrea, and thus making them seem at the centre of a whirl of professional activity that constitutes "normal science". The motive for THAT is to then be able to point to the Krugmans and DeLongs and say "Well, THEY'RE out of touch. What would they know about modern macro?"

This tactic is extraordinarily transparent. Why are you falling for it?

Collegiality and similarity of technique are not measures of a field's health. They are measures of a field's "internal comfort"; how many of its everyday practitioners think that what they are collectively doing is sound and proper. It's a vague and loose form of internal validation, but it does not pass muster on any test of external validation of the work that counts.

Isn't that the upshot of my post??

Now the journals simply avoid reflecting the combativeness (except sometimes the JEP), and the blogs are the battlegrounds, and people get nasty.

Yup, exactly.

This tactic is extraordinarily transparent. Why are you falling for it?

I'm not falling for anything, trust me. Yes, this is what Steve and David etc. are doing, but they'd probably be the first to admit it. It's not exactly a sneaky trick.

Yes, exactly. If it's not transparent, you're not getting it. One thing I should correct, though, is that I'm not out to place myself at the center of the academic action. That would be rather immodest. My friends would give me a hard time.

Mr. Williamson: you are, however, attempting to place your intellectually bankrupt, disconnected-from-reality economic theories at the center of the academic action. That's immoral. You don't realize it's immoral, because you don't realize how intellectually bankrupt and disconnected from reality your economic theories are.

You should, since they've been wrong for decades, appear to have no predictive value at all, and they've destroyed the global economy. (DSGE models are particularly worthless intellectually, while "risk assessment" models and "efficient market hypotheses" assisted politically with the destruction of the world economy.)

There's probably a psychological reason why you don't want to realize the truth about the worthlessness of most of the last 30 years of macroeconomics; I can think of several possible reasons, as can other commenters.

We wish you luck in waking up to the reality: you've been writing in a field which are about as connected to reality as the medieval Catholic discussions about angels dancing on the head of a pin. They thought they were discussing reality too.

Can't seem to get the in-thread reply working. Apologies for that, but here goes.

I imagine that others, like me, were reacting to "On the question of whether macro is divided into warring "schools", I'd say Williamson is 85% right, and Krugman only 15%."

IF you're saying that, as directly observed through the journals and elsewhere, macroeconomic discourse "appears" (however meaninglessly) visibly intellectually harmonious and seemingly productive, then I suppose that yes, Williamson has the better of the argument. It does "seem" that way.

But then, the end of that paragraph makes a very casual and passing reference to some nasty blog behaviour, which is then disregarded, and the next paragraph seems (to me anyway, and I think some others) to proceed in two steps:- yes, macro probably really is harmonious and productive;- but maybe we seem to be overestimating, and hence overselling, what we really know *chin scratch, idle musing out loud*

You start by accepting (or so it appears) the comparative unity of the profession, as if it's quibbling over minor frontier questions as normal science proceeds apace, and then you go on to ponder whether maybe this united profession, with an agreed orthodoxy of method and approach, is not quite as good as it thinks.

Perhaps it's a tone choice you've made, but it's odd.

Williamson addresses "text" -- the mainstream profession as measured by what happens in the journals blah blah blah. He assumes the text is a good measure of something (intellectual coherence? external validity), and then validates what he does with reference to the text. And that being an active and recognised contributor to this text gives one an insider status and authority with which to react to external criticisms of it.

Krugman addresses "sub-text" -- what's happening less visibly underneath/arouind the text, and that the text itself is a misleading indicator of professional coherence; that the text is biased in method (all DSGE, all the time); and that recognised contributors to the text are making howlers when contributing to the public discourse. His argument is a direct critique of the text itself as a useful indicator of professional coherence.

I read your post as saying, or implying at least, that yes, there's comparative unity and harmony in the profession (compared to those bad old days when Friedman and Tobin went hammer-and-tongs and then ... left it on the field, seemingly! How dare they?), but maybe it isn't quite living up to its hype.

I think a bunch of commenters, myself included, are wondering why there's this great big stinking elephant in the room that you've done a great job of very delicately tip-toeing around.

"Weirdly, I dislike REH but I like the EMH a lot. The EMH can be approximately true even if REH fails catastrophically."I find interesting the point that has been raised recently that you can get gross violations of EMH from models that include a financial sector with mechanics of its own. One recent example is

A Theoretical Analysis of Momentum and Value StrategiesDimitri Vayanos and Paul Woolley

Well, I've seen a number of these "evolutionary markets" models recently, and they are very interesting of course.

The problem is, they are very rigid. The strategies can't change and evolve nearly as much as real strategies can. It's possible to get dynamics in these simple ecosystems that are far removed from what we see in real markets.

But on the other hand, I'm very interested in this sort of model to explain some of the experimental results I've been getting...

BTW, did you know that bloggers Mark Thoma and Rajiv Sethi have worked on these sorts of models?

I've only scanned the comments, but spotted no mention of data issues. To take the US case, maybe we can accept data from 1982, though interstate banking was in its infancy and global capital markets had yet to recover to pre-1914 levels. So, generously, that gives us 120 quarterly observations, plagued by real-nominal conversions and the inability to measure many key variables. That's simply too few degrees of freedom to produce convergence, given the number of variables that we believe we know matter (I use readings by Jesus Fernandez-Villaverde and Ray Fair with my undergrad seniors). So is it any wonder that fundamentally inconsistent models and policy stances persist?

It doesn't explain why a profession with scientific pretenses insists on methods, theoretical and empirical, which will not let them arrive at a conclusion in under a thousand years.

In answer to the question, "What have you done for me, lately?", I think I would count the consequences of policy since around 1999, including the debacle of the GFC 2008, against the profession.

The economy, in contrast to the seismology of the earth, and even in contrast to the weather/climate, is almost entirely artifactual. You may wish to regard the economic system as complex, but you really don't have grounds for regarding it as chaotic -- it is as "chaotic" as the ignorance and perfidy of economists make it. And, there's no more damning case to be made than the response of economists to, and complicity in, the "savings glut", housing bubble and global financial crisis.

"it is as "chaotic" as the ignorance and perfidy of economists make it."

You seem to think that all voter are economists voting for candidates who are also economists and govern professionals who are themselves economists. The truth is, the system is chaotic because of the stupidity of people like you.

You and Brad are correct. There has been no useful macroeconomics developed in the "mainstream" of the profession (as opposed to folks like D. McCloskey) since the 1970s. (Well, OK, maybe a little bit in international trade, hat tip to Prof. Krugman.)

The debunking of the Phillips Curve may have been the last useful thing done in Macro. And it was replaced with the stupidest piles of bullshit ever: Friedman's and Lucas's critiques were *both wrong*. Extremely wrong.

At this point, after studying the period, I am convinced I know why the Phillips Curve failed.

The Phillips Curve was wrong solely because it didn't account for key resource shortages. In the 1970s, that was mostly peak oil and the OPEC oil shocks. Yes, the inflation started a bit earlier -- due to CROP FAILURES and FOOD SHORTAGES, which will have the same effect! (I only just studied enough history to figure this bit out.)

Everything was amplified by the thoughtless wage and price controls under Nixon, which induced *artificial* shortages on top of the real ones.

Most economists still haven't figured this out! The entirety of macroeconomics has gone down a wrong path because y'all *never figured out what went wrong in the 1970s*. The answer was: real resource shortages. *Only the environmental economists paid attention to this.*

The Phillips Curve works *only* if labor is the limiting resource in the economy. In that case, it shows that inflation goes up when employment goes up and inflation goes down when employment goes down. But labor isn't always the limiting cofactor of production for the economy.

If oil is the limiting resource in the economy, suddenly it's a curve showing that inflation goes up when oil use goes up, and inflation goes down when oil use goes down.

This will be relevant again if we start increasing employment, since easy-to-extract oil is gone. The country with the least oil-dependent, most solar-based economy will have the lowest inflation.

If food is the limiting resource, then suddenly it's a curve showing that inflation goes up when food use goes up and inflation goes down when food use goes down. Uh... except we can't ethically control that in the short term... so in that case, live with the inflation, it's unavoidable. Oh, and encourage birth control so as to reduce the population.

It's important to realize that the limiting real resource for the economy is not always labor. This is an insight which, among macroeconomists, *only* the environmental economists seem to have appreciated.